[Federal Register: March 30, 2004 (Volume 69, Number 61)]
[Rules and Regulations]
[Page 16460-16471]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30mr04-2]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 614, 620, 630
RIN 3052-AC07
Loan Policies and Operations; Disclosure to Shareholders;
Disclosure to Investors in Systemwide and Consolidated Bank Debt
Obligations of the Farm Credit System
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, agency, we, or our)
issues this final rule amending our regulations governing the Farm
Credit System's (System) mission to provide sound and constructive
credit and services to young, beginning, and small farmers and ranchers
and producers or harvesters of aquatic products (YBS farmers and
ranchers or YBS). Additionally, with this final rule, the agency amends
the System's disclosure to shareholders and investors to include
reporting on its service to YBS farmers and ranchers.
EFFECTIVE DATE: This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Robert E. Donnelly, Senior Accountant,
Office of Policy and Analysis, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4498, TTY (703) 883-4434,
or
Wendy R. Laguarda, Senior Counsel, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-2020.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective of this rule is to ensure that the System provides
sound and constructive credit and services \1\ to YBS farmers and
ranchers.\2\ To accomplish this objective, the rule amends our existing
regulations to provide:
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\1\ The term ``services'' includes leases and related services
to YBS farmers and ranchers.
\2\ The Farm Credit Act of 1971 (1971 Act) gave the production
credit associations and the banks for cooperatives the authority to
finance ``producers or harvesters of aquatic products'' in addition
to financing ``farmers and ranchers.'' The 1980 amendments to the
1971 Act gave the Federal land banks expanded authority to finance
``producers or harvesters of aquatic products'' and put such
producers and harvesters on the same footing as ``farmers and
ranchers.'' Thus, in accordance with the amendments to the 1971 Act,
whenever we refer to ``YBS farmers and ranchers'' or ``YBS
borrowers'' in this rule, we are including ``producers or harvesters
of aquatic products.''
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1. Clear, meaningful, and results-oriented guidelines for System
YBS policies and programs; and
2. Enhanced reporting and disclosure to the public on the System's
performance and compliance with its statutory YBS mission (YBS mission
or mission).
Through these amendments, the public will be better able to measure
the
[[Page 16461]]
System's performance in fulfilling its YBS mission.
II. Background
As discussed in the preamble to the proposed rule (see 68 FR 53915,
September 15, 2003), section 4.19 of the Farm Credit Act of 1971, as
amended (Act), requires each System association to prepare a program
for furnishing sound and constructive credit and related services to
YBS farmers and ranchers. Congress added this section to the Act in
1980 to focus the System's attention on the need to have programs for
such borrowers. Our current YBS regulations restate the YBS
requirements in the Act. Further interpretation of the Act's YBS
requirements currently is found in agency policy guidance.\3\
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\3\ See infra, notes 4 and 5.
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As stated in our proposed rule, YBS farmers and ranchers, like all
those in agriculture today, face a wide range of challenges, including
access to capital and credit; the impact of rising costs on
profitability; urbanization and the availability of resources like
land, water and labor; globalization; and competition from larger or
more established farms. Although all agricultural producers face these
challenges, the hurdles that YBS farmers and ranchers face are often
greater. We continue to believe the System's YBS mission is important
to enable small and start-up farmers and ranchers to make successful
entries into agricultural production. The System's YBS mission is also
critical to facilitate the transfer of agricultural operations from one
generation to the next. For all these reasons, the agency remains
committed to ensuring that the System fulfills its important public
purpose mission to YBS farmers and ranchers.
In the proposed rule, the agency set forth minimum components that
each System direct lender association must include in its YBS program
and added requirements to enhance the reporting and disclosure to the
public of the System's YBS programs, compliance, and performance.
The content of the proposed rule was an outgrowth of an initiative
undertaken by the agency to renew the System's commitment to its YBS
mission. This initiative began in 1998, with the adoption of an FCA
Board policy statement that provided guiding principles for enhanced
service to YBS farmers and ranchers.\4\ To implement the policy
statement, the agency issued a bookletter that included revised YBS
definitions and YBS reporting procedures.\5\ The revised reporting
procedures contained in the bookletter require System institutions to
submit detailed annual reports to the agency on all aspects of their
YBS programs.
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\4\ FCA-PS-75, Farm Credit System Service to Young, Beginning,
and Small Farmers and Ranchers effective December 10, 1998,
available on the FCA Web site, http://www.fca.gov (under Legal
Info., FCA Handbook).
\5\ FCA BL-040, Policy and Reporting Changes for Young,
Beginning, and Small Farmers and Ranchers Programs, issued December
11, 1998, available on the FCA Web site, http://www.fca.gov (under
Legal Info., FCA Handbook).
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In furtherance of this initiative, in 1999, YBS lending programs
became a ``focus area'' of agency examinations where, among other
factors, the agency reviewed System institutions' YBS board policies
and procedures; YBS credit enhancement programs and underwriting
standards; YBS program coordination with Federal, state, System or
other credit sources; demographic studies; marketing, advertising, and
other outreach programs; and the quality of YBS reporting to System
institutions' boards and FCA. Additionally, for the past 3 years, the
FCA recognized the exemplary YBS programs of several System
associations.
In the proposed rule, we also discussed the March 8, 2002, General
Accounting Office (GAO) report on our oversight of the System's mission
to serve YBS farmers and ranchers.\6\ The GAO report recommended, in
part, that the agency strengthen its oversight role of the System's YBS
lending, promote YBS compliance, and highlight the System's efforts to
provide services to YBS farmers and ranchers by:
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\6\ Farm Credit Administration: Oversight of Special Mission to
Serve Young, Beginning, and Small Farmers Needs to be Improved (GAO-
02-304), available on the GAO Web site, http://www.gao.gov/cgi-bin/getrpt?GAO-02-304
.
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1. Promulgating a regulation that outlines specific activities and
standards that constitute an acceptable program to implement the YBS
statutory requirement;
2. Ensuring that examiners follow the guidance, complete the
appropriate examination procedures related to YBS, and adequately
document the work performed and conclusions drawn during examinations;
and
3. Publicly disclosing the results of the examinations for YBS
compliance for individual System associations.
In the proposed rule we noted that in its response to Congress, the FCA
expressed its commitment to address the issues raised in the GAO
report.
In continuance of our YBS initiative, the agency sought public
input through an advance notice of proposed rulemaking (ANPRM) \7\ and
a public meeting held on November 13, 2002, in Kansas City,
Missouri.\8\ We discussed that our objectives for the ANPRM and public
meeting were to seek the public's suggestions on possible YBS
regulatory approaches and policy initiatives and to hear about ways to
enhance the System's service to YBS farmers and ranchers. The comments,
in response to the ANPRM and from the testimony at the public meeting,
reflected a multitude of opinions on the issue of whether the agency
should provide more guidance to the System on YBS policies and
programs. The preamble to the proposed rule provided an extensive
discussion of those comments together with the agency's responses.
Overall, the comments were generally divided between those that opposed
the issuance of revisions to the agency's YBS regulation and those that
supported additional regulatory requirements.
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\7\ See 67 FR 59479, September 23, 2002.
\8\ See 67 FR 64320, October 18, 2002.
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III. General Comments Received
In response to the proposed YBS rule, the agency received 52
comment letters. Commenters included the Farm Credit Council, System
institutions, commercial banks, the American Bankers Association, the
Independent Community Bankers of America, and other associations or
trade groups involved in agriculture, such as the Sustainable
Agriculture Coalition and the Farmers' Legal Action Group. Many of
these commenters included by reference their previous comments in
response to the ANPRM. In fact, a majority of the comments received in
response to the proposed rule were identical or similar to the comments
on the ANPRM and testimony at the public meeting and are addressed in
our responses to the comments below. The commenters generally can be
divided into two groups--those that oppose the additional requirements
in the proposed rule and those that believe the proposed rule should go
further in delineating YBS program, reporting, and disclosure
requirements. Our responses to all these commenters are included in
this section on general comments and in the section-by-section response
further on in part VI of this preamble.
A few commenters supported the proposed rule, stating specifically
that it supports FCA's effort to help YBS farmers and ranchers and that
the reporting requirements should help improve transparency and
accountability. The agency agrees that the final YBS rule, which
provides results-oriented guidelines for YBS policies and programs and
enhanced reporting and disclosure requirements,
[[Page 16462]]
should ensure that the System continues to remain focused on and
committed to its YBS mission.
Many commenters opposed the proposed rule, stating that:
The requirements would create additional burdens
and costs for System institutions without providing new tools for
better servicing YBS farmers and ranchers or increasing the number of
YBS loans;
Additional costs resulting from a revised YBS
rule would be passed on to the farmers and ranchers and is inconsistent
with congressional directives to eliminate unnecessary and burdensome
regulations;
The System, which is tasked with serving all of
American agriculture, recognizes the importance of and is already
adequately serving the credit needs of YBS farmers and ranchers; and
There is no evidence suggesting YBS farmers and
ranchers are being denied access to credit by the System.
The commenters expressed concern that the proposed rule is the product
of a GAO report on the agency's oversight of the System's mission to
serve YBS farmers and ranchers and requested that FCA reconsider the
issuance of a revised YBS rule, as well as its response to GAO. Many of
these commenters suggested that, rather than issuing a revised YBS
rule, the agency should use its enforcement authority to address any
System shortfalls in meeting the credit needs of YBS borrowers.
Many of the foregoing comments are similar or identical to comments
made in response to the ANPRM and the testimony at the public meeting
on YBS guidance. As we stated previously, section 4.19 of the Act
requires the System to pay particular attention to the credit and
related services needs of YBS farmers and ranchers. Congress inserted
section 4.19 of the Act, in part, as a response to a recognition that
the family farm was declining in American agriculture at an alarming
rate. This final rule is not a response to a perception that the System
does not value or adequately serve YBS borrowers. Rather, the rule is a
means to ensure that the System remains focused on this very important
group of potential borrowers so that they can continue to have a future
in agriculture. Thus, the agency does not believe that a regulation to
ensure the System meets its YBS statutory mandate is unnecessary.
Further, we do not believe that this YBS final rule will result in
significant additional burdens or costs for the System. Many of the
rule's requirements already exist in current YBS guidance and
examination and reporting requirements to which the System must
currently adhere. Although the 2002 GAO report focused attention on the
agency's oversight role of the System's YBS mission, well before the
issuance of the report, the agency had taken significant steps to
direct the System to refocus on its YBS mission. Specifically, in 1998,
the agency issued a policy statement and bookletter on the YBS mission
and, in 1999, the agency made YBS a focus area of agency examinations.
In fact, since 1980, when Congress first added section 4.19 to the Act,
the agency has had regulatory and policy guidance on the System's YBS
mission to supplement the Act's general YBS requirements for System
banks and direct lender associations. As seen by our efforts previous
to the GAO report, the final rule is not simply a response to GAO, but
a means to ensure that the System continues to actively and creatively
seek ways to finance and service the needs of YBS borrowers.
Finally, FCA has taken a proactive approach to its oversight role
of the System's YBS mission. By issuing this final rule, we strive to
ensure that the System will successfully fulfill its YBS mission and
diminish the need for ensuring mission accomplishment through the use
of our enforcement authorities. We note, however, that by moving much
of the current YBS guidance from a policy statement and a bookletter to
a rule, we are strengthening our ability to more effectively take an
enforcement action against a System institution for its failure to meet
its YBS responsibilities should it become necessary.
A number of commenters suggested the agency eliminate the scope of
lending restrictions limiting lending to less than full-time farmers so
that part-time farmers have more access to credit. This issue is
currently under review as part of a separate agency rulemaking on scope
and eligibility. However, even if FCA were to remove the scope of
lending restrictions, a regulation on YBS would still serve to enhance
the System's fulfillment of its YBS mission.
One commenter suggested that the removal of territorial
restrictions would enable some System associations with a strong
commitment to serving YBS farmers and ranchers to fill a need when a
neighboring association fails to adequately serve its YBS market. A
consideration to remove territorial restrictions is not currently
listed in the agency's regulatory performance plan (available on the
agency's Web site, http://www.fca.gov). However, with this final rule,
the agency can better assess the effectiveness of an association's YBS
program and determine, through the examination process, whether an
association is adequately serving its YBS market.
Some commenters suggested that the agency allow the use of System
subsidiary entities, which, they believe, would make it easier for
System associations to provide funding for higher risk YBS loans and
increase lending to YBS borrowers. Efforts to create new corporate
structures for System institutions have broad implications beyond
service to YBS farmers and ranchers. Some System institutions have
approached the agency to discuss their desire to create new entities
for various purposes, including YBS-related purposes. The agency will
continue to respond directly to those requests, but believes that the
issue raised by the commenters goes beyond the scope of this
rulemaking.
One commenter recommended that the agency require System
institutions to expand their YBS programs by adding a fourth category
for ``socially disadvantaged'' farmers and ranchers. Similarly, another
commenter recommended that the System gather data about the gender and
ethnicity of the borrowers they serve to ensure credit is being
provided equally across such categories. Requiring the System to
implement either of these recommendations is beyond the agency's
authority because the Act neither includes a special mission to serve
``socially disadvantaged'' farmers or ranchers nor a directive to serve
borrowers of a certain gender or ethnicity. We note, however, that
these groups are not excluded from the System's overall mission.
Section 1.1(a) of the Act requires the System to serve all eligible
American farmers and ranchers. In fact, System YBS programs often
include service to socially-disadvantaged, women, and minority farmers
and ranchers, as these groups often comprise either young, beginning,
or small farmers and ranchers. Thus, the enhanced YBS rule should also
advance the System's service to these groups of potential borrowers.
Two commenters stated that the FCA needs to prohibit System
institutions from engaging in below-market pricing of loans in order to
avoid ``cherry-picking'' the best borrowers. This same comment was made
in response to the ANPRM on YBS. At that time, we responded by
explaining that sections 1.8(b) and 2.4(c)(2) of the Act provide that
``it shall be the objective'' of System lenders to set interest rates
and other charges ``at the lowest reasonable costs on a sound business
basis'' taking into consideration the lender's cost of funds,
[[Page 16463]]
necessary reserves, and the cost of providing services to its members.
Thus, the System is fulfilling its public purpose under the Act when it
provides interest rates at the lowest reasonable cost on a sound
business basis. In addition, through the examination process, the
agency routinely reviews each System institution's loan pricing to
ensure that interest rates charged to borrowers cover costs and provide
additional capital to ensure the institution's ongoing safety and
soundness. Moreover, in our oversight and regulatory role, we ensure
that the System is providing sound, adequate, and constructive credit
and related services to all eligible American farmers and ranchers.
Finally, one commenter suggested that the agency remove any
suggestions or recommendations from the final rule so that it is clear
what the rule requires. The agency believes that the requirements in
the rule are clearly marked by the use of the word ``must.'' One
section of the rule, namely Sec. 614.4165(c) on direct lender
association YBS programs, contains suggestions, marked by the use of
the words ``may'' or ``could.'' The agency deliberately used suggestive
language in this section to allow a direct lender association maximum
flexibility in designing a YBS program that best fits the needs of its
territory and is within its risk-bearing capacity. Thus, although all
System associations must develop annual quantitative YBS targets, the
rule offers suggestions only on what such targets might look like.
Similarly, although direct lender associations YBS programs must
include annual qualitative YBS goals and methods to ensure that such
programs are offered in a safe and sound manner and within their risk-
bearing capacity, the way in which associations fulfill these
components of the program is left up to them. We believe that through
the use of the words ``must'' and ``may,'' the final rule clearly
delineates what is required from what is simply suggested as a way of
meeting a particular program component requirement.
Another section of the proposed rule, namely Sec. 614.4165(d) on
advisory committees, is also not a requirement but only a suggested
activity for an association's YBS program. However, because the
formation of a YBS advisory committee is a type of outreach activity,
we have moved this suggestion in the final rule to Sec.
614.4165(c)(3)(iii) on outreach programs rather than retain it as a
separate, suggested component. We believe this change in the rule will
make it clearer that the formation of a YBS advisory committee is a
suggested activity, rather than a required component, of a YBS program.
Lastly, one commenter opposed any programs that support YBS farmers
and ranchers, especially if such programs are financed with taxpayer
dollars. This commenter appears to be unclear about the purpose of the
proposed rule and the role of the System. Section 4.19 of the Act
requires the System to serve the credit and related services needs of
YBS farmers and ranchers. A regulation on System YBS programs serves to
support the YBS statutory requirement. Further, we note that, as a
Government-sponsored enterprise (GSE), the System does not operate with
taxpayer dollars and so its YBS programs are financed with private
funds rather than public monies.
IV. Comments on the Pass/Fail Rating
In the preamble to the proposed rule, the agency discussed its
intention to assign a ``pass'' or ``fail'' rating to each direct lender
association's overall YBS program. We further stated that this YBS
compliance rating would be based on a review of the direct lender
association's YBS program components during an examination of an
association. We also mentioned the FCA Board's intention to publicly
disclose the results of the System's YBS compliance.
Many commenters raised opposition to the implementation of any kind
of YBS rating or the disclosure of compliance results to the public.
These commenters stated that such disclosures would not be useful
because the circumstances of each association are unique. These same
commenters expressed further concerns that the agency had not clearly
set forth the criteria it would use to determine a ``pass'' or ``fail''
rating, and therefore the determination of such ratings would be
arbitrary. The commenters expressed concern that without clear
criteria, a ``pass'' rating would not provide the public with any
useful information, while a ``fail'' rating could unfairly damage an
association's reputation and competitive position. These commenters
questioned whether such disclosure was appropriate or even authorized
by Congress, stating further that examination results are, and should
remain, confidential. Finally, these commenters stated that such
ratings were unnecessary because of the extensive reporting and
disclosure requirements in the proposed rule.
Many other commenters expressed support for rating the YBS programs
of direct lender associations. In addition, these commenters suggested
that FCA not only require disclosure of each direct lender
association's YBS rating, but also disclosure of agency examination
results of each association's YBS program. These commenters also
asserted that the agency's YBS ratings should be expanded to be more
comparable to the ratings other financial institutions are subject to
under the Community Reinvestment Act (CRA) and the Home Mortgage
Disclosure Act of 1975 (HMDA). These commenters point out that
financial institutions subject to CRA and HMDA are required to disclose
to the public their performance ratings in serving low and moderate
income households. The commenters note that, under CRA, a financial
institution's performance is rated as ``outstanding,''
``satisfactory,'' ``needs improvement,'' or ``substantial
noncompliance.'' The commenters stated that since the System is a GSE,
the agency should impose YBS ratings at least as stringent as CRA
ratings. Many of these same commenters also suggested that the agency
make both the YBS rating and examination results of each direct lender
association available to the public on the agency's Web site, similar
to the practice of the other Federal financial regulators under CRA.
Finally, several of the commenters state that many of their
recommendations are consistent with the issues raised in the GAO
report.
Many of these comments are similar, if not identical, to comments
we received and addressed in response to the ANPRM. The commenters that
remain opposed to the imposition and disclosure of a YBS compliance
ratings and those that desire expansions to the ``pass/fail'' ratings
provide little or no new arguments in support of their positions. The
agency continues to believe it is important to measure and provide the
public with a complete and accurate picture of the System's YBS
compliance and performance. Again, we believe this will be best
accomplished through disclosure of some form of rating that indicates
each direct lender association's compliance with the minimum components
for a YBS program, along with the requirement that each System
institution report on and publicly disclose its YBS mission results.
In consideration of the comments on the ``pass/fail'' rating, we
now want to clarify that the ``pass/fail'' rating is a compliance
rating only that will simply indicate whether direct lender association
YBS programs meets the requirements of this rule. In contrast, the
enhanced YBS reporting and disclosure requirements in the rule will
reveal the performance results of each association's YBS program. We
also point out that the ``pass/fail'' rating
[[Page 16464]]
process, which has not been incorporated into the rule itself, is an
internal examination function that we discuss in this preamble only to
highlight the direction of FCA concerning its YBS examination efforts.
The agency is considering what type of examination procedures are
necessary for evaluating each direct lender association's YBS program
compliance with the provisions in this rule. Once developed, the YBS
examination criteria also will be included in the agency's examination
manual (available on our Web site at http://www.fca.gov).
The agency continues to believe that some form of disclosure of
direct lender associations' YBS ratings, combined with the required YBS
reporting and disclosure requirements in this final rule, will provide
the public with a sound understanding of each association's YBS
compliance and performance and will also help the System to better
fulfill its YBS mission. Furthermore, the agency continues to believe
that it not only has the authority, but also the responsibility in its
oversight and regulatory role, to disclose YBS compliance ratings and
to ensure that the System describes its performance results to the
public. The agency will continue to assess the most effective way to
make the YBS ratings available to the public.
As stated in the preamble to the proposed rule, the agency believes
it is inappropriate to disclose confidential examination report
information. In addition, we continue to believe the additional
transparency provided by the enhanced reporting and disclosure
requirements in the rule will give the public a sound understanding of
the System's YBS compliance and performance results and will,
therefore, preclude the need for disclosing the YBS sections of agency
examination reports. If the agency determines that an institution's
reporting and disclosure do not provide a sound understanding of the
System's YBS compliance and performance results, the agency can remedy
any shortcomings through its supervisory and enforcement authorities.
As to the suggestions for implementing disclosures similar to CRA and
HMDA, we note that the Act does not have the same requirements for YBS
ratings and disclosure as those set forth in the CRA or HMDA. However,
we believe that the enhanced rating, reporting, and disclosure
requirements of this rule fulfill the YBS provisions in the Act and
will provide effective disclosure to the public on the System's YBS
programs, as well as mission shortfalls and accomplishments.
V. Comments on YBS Data Collection Issues
Many commenters once again made suggestions on ways to improve the
accuracy of the YBS data collected by the agency from System
institutions. Some commenters suggested the agency ensure that loans to
father and son operations are counted as YBS loans only when the son is
actively involved in the farm operation. Under current agency guidance,
if a son is co-obligated on the father's loan or has an ownership
interest with his father in the farm operations, the loan can qualify
as a YBS loan as long as one or more of the YBS definitions is met. We
believe this criteria is appropriate for counting the loan in any of
the YBS categories. Requiring a YBS borrower to be actively involved in
the farming operations is inconsistent with the purpose of YBS lending.
The purpose of the YBS mission is to permit YBS farmers, who often are
required to earn off-farm income to maintain their farming operations,
to get started in agriculture by a variety of means. Thus, we do not
see where additional criteria to assess a son's actual involvement in
the farming operations would substantially improve upon the accuracy of
the YBS data collected by the System or improve upon the System's
service to YBS farmers and ranchers.
These commenters also suggested that the agency aggregate loans to
one borrower to determine whether the borrower is a ``small'' farmer
and that we add a category for ``part-time'' farmers to the YBS
categories. Under current agency procedures, our determination of a
``small'' farmer is based on gross sales of agricultural or aquatic
products rather than loan volume. As discussed at length in the
preamble to the proposed rule, we believe the current definitions for
the YBS categories, which were revised in 1998, properly reflect the
changes in agriculture over the years and provide the most accurate
picture of the System's service to YBS farmers and ranchers. Thus, we
see no benefit to changing our definition of ``small'' farmer.
Similarly, we see no benefit to adding a separate category for
part-time farmers. Congress mandated the agency to collect information
on ``young,'' ``beginning,'' and ``small'' farmers and ranchers. The
commenters provided no rationale for requiring System institutions to
distinguish between part-time and full-time farmers in their YBS
reporting. Moreover, we believe that part-time YBS farmers, who often
need off-farm income to make ends meet, are just as deserving of YBS
credit and services as full-time farmers.
Other commenters reiterated their concern that the System be
prevented from inflating its YBS numbers by allowing the same loan to
be counted separately in each applicable YBS category. These commenters
also expressed a preference for having the System count and report on
the number of YBS borrowers rather than loans.
The foregoing comments are similar to comments we addressed in
response to the ANPRM. We continue to disagree with the implications of
these comments that the reported YBS information is inaccurate and
misleading. As explained in the preamble to the proposed rule, the
practice of reporting a loan in each applicable YBS category is
consistent with other GSE mission-related reporting, such as the
Federal National Mortgage Corporation (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac) reports on their annual housing
goals,\9\ as well as with congressional intent to report on the
System's service to each category of YBS farmers and ranchers. Finally,
in the agency's Performance and Accountability Report for fiscal year
2002, the information on the System's YBS lending explicitly states
that YBS categories are not mutually exclusive. Therefore, one cannot
add across YBS categories to count total YBS lending.
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\9\ The annual housing goals are established and supervised by
the Department of Housing and Urban Development, Fannie Mae's and
Freddie Mac's regulator.
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As also explained in our response to the comments received on the
ANPRM, in 1998, the agency made several changes to the way it collected
YBS data from the System, including collecting YBS data based on the
number of YBS loans rather than the number of YBS borrowers. The
changes were consistent with the new YBS definitions the agency
developed at that time and were made to capture more complete
information on the System's extension of credit and services to YBS
farmers and ranchers. In addition, we believe that the collection of
loan numbers in combination with loan volume (that is, the average size
of an institution's YBS loan) provides the public a base for a more
useful comparison of the System's extension of credit to YBS borrowers.
The agency continues to believe that the key issue in YBS data
collection is consistent YBS reporting throughout the System. We
believe that our current method of categorizing and counting the
System's YBS loan numbers and loan volume provides the most accurate
and
[[Page 16465]]
complete picture of the System's YBS mission fulfillment.
Finally, other commenters suggested that FCA examiners verify the
accuracy of the YBS data being reported by System institutions. We note
that data verification, conducted on a sampling basis, is already a
part of YBS examination procedures.
The remaining comments discussing the particulars of the proposed
rule are addressed in the following section of this document.
VI. FCA's Section-by-Section Response to Comments
Section 614.4165(a)--Definitions
The proposed definition section clarified various terms used in
section 4.19 of the Act. For instance, this section clarifies that, for
purposes of this subpart, the term ``credit'' includes all loans and
interests in participations made by System banks and direct lender
associations operating under titles I or II of the Act. The term
``services,'' as used in section 4.19(a) of the Act, includes all
leases made under titles I or II authorities and all related services
made by System banks and direct lender associations operating under
titles I or II of the Act.
We received only one comment on this section, suggesting that we
develop a meaningful definition of a small farm or ranch, one that is
useful in today's market environment and based on input from all
appropriate entities.
As mentioned in the preamble to our proposed rule, the agency's
current definitions for ``young,'' ``beginning,'' and ``small'' farmers
and ranchers are set forth in 1998 FCA guidance.\10\ The guidance
defines ``small'' as a farmer, rancher, or producer or harvester of
aquatic products who normally generates less than $250,000 in annual
gross sales of agricultural or aquatic products. We discussed the
extensive research the agency undertook in arriving at this definition
of ``small'' farmer and rancher, which included evaluating terms used
by the United States Department of Agriculture (USDA) and other
regulatory agencies who collect data on ``small'' farmers and ranchers.
Thus, we continue to believe the definition for ``small'' farmers and
ranchers currently in use by the agency is appropriate. For the
foregoing reasons, we adopt proposed Sec. 614.4165(a) as final without
change.
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\10\ See supra note 5.
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Section 614.4165(b)--Farm Credit Bank Policies
This section implements certain provisions of section 4.19 of the
Act, which require each:
1. Direct lender association to adopt a YBS program under the
polices of its funding \11\ Farm Credit bank board;
---------------------------------------------------------------------------
\11\ Although section 4.19 of the Act refers to ``district'' and
``supervising'' Farm Credit banks, we use the term ``funding'' bank,
which we believe more appropriately reflects the current
relationship between a Farm Credit bank and its affiliated direct
lender associations.
---------------------------------------------------------------------------
2. Direct lender association to coordinate with other System
institutions in its territory, and other governmental and private
sources of credit in extending credit and services to YBS farmers and
ranchers;
3. Direct lender association to report annually on its YBS programs
and performance results to its funding bank; and
4. Farm Credit bank to report annually to the FCA summarizing the
YBS program operations and achievements of its affiliated direct lender
associations.
Two commenters expressed concern that requiring banks to have
written policies on their affiliated associations' YBS programs is
contrary to FCA's recognition that direct lender associations have
gained more autonomy from their funding banks since 1980, when section
4.19 was first added to the Act. Notwithstanding the fact that System
banks have taken a diminished role in overseeing the operations of
their affiliated direct lender associations, the requirements in this
section track the requirements of section 4.19 of the Act, which we
simply are not at liberty to disregard. Therefore, we adopt Sec.
614.4165(b) as final without change.
Section 614.4165(c)--Direct Lender Association YBS Programs
This section sets forth the minimum components that each direct
lender association must include in its YBS program while at the same
time allowing each association to design a YBS program unique to its
territory. At a minimum, when developing a YBS program, each direct
lender association must:
1. Develop a YBS program mission statement describing the YBS
program objectives and specific means of achieving those objectives;
2. Develop annual quantitative targets for credit to YBS farmers
and ranchers that are based on an understanding of reasonably reliable
demographic data for the lending territory;
3. Develop annual qualitative goals that include efforts to offer
services that are responsive to the needs of YBS borrowers, take full
advantage of opportunities for coordinating credit and services with
other providers of credit, and implement effective outreach programs to
attract YBS farmers and ranchers; and
4. Establish methods to ensure that it is conducting its YBS
program in a safe and sound manner and within its risk-bearing
capacity.
Several commenters commended Sec. 614.4165(c) of the proposed rule
because it allows System associations to take into consideration the
demographics and economy of their territories along with their risk-
bearing capacities when establishing their YBS programs. Two commenters
supported the minimum YBS components required by the proposed rule.
However, many commenters stated that in the Act Congress left the
design of each association's YBS program up to their respective funding
banks. These commenters stated that Congress recognized that local
conditions warrant different approaches and deferred to the wisdom and
local knowledge of the System bank boards to establish policies to
guide these programs.
Since 1980, when section 4.19 was first included in the Act, the
relationship between the funding banks and their affiliated
associations has significantly changed, with the associations operating
much more independently from their funding banks. Although the rule
retains the statutory directive for associations to establish their YBS
programs under the policies of their funding banks, in recognition of
the autonomy with which associations now operate, we have kept the bank
policies to a minimum, as discussed earlier. Moreover, we agree that
Congress intended YBS programs to be developed by the System lenders
who have the most knowledge of their territories. We have, therefore,
developed this section to allow each direct lender association maximum
flexibility in creating a YBS program that takes into consideration the
economy and demographics of its territory, as well as its risk-bearing
capacity. In so doing, the YBS rule is consistent with congressional
intent to allow each association to design a YBS program that best fits
the needs of its lending territory.
Section 614.4165(c)(1)--Mission Statement
One commenter stated that it is inappropriate and potentially
confusing for a regulation to require a mission statement that focuses
only on YBS programs rather than on the System's
[[Page 16466]]
mission to serve all of American agriculture.
We do not agree with the commenter's concern that a mission
statement focusing strictly on an association's service to YBS farmers
and ranchers is inappropriate or confusing. We believe the exercise of
developing a mission statement will compel each direct lender
association to focus on the objectives of its YBS program and the steps
it must take to accomplish such objectives. Further, developing a
mission statement to give direction to an association's YBS program
does not in any way hinder an association's capacity and responsibility
to serve all of American agriculture.
Section 614.4165(c)(2)--Quantitative Targets
Many commenters responded to this section of the proposed rule. One
commenter suggested that this section be changed to permit System
associations to consider their financial condition and risk-bearing
capacity when establishing quantitative targets. In fact, Sec.
614.4165(c)(4) requires each System association to have methods to
ensure that it offers credit and related services to YBS borrowers in a
safe and sound manner and within its risk-bearing capacity. Thus,
quantitative targets and qualitative goals must be established with
these safety and soundness factors in mind.
One commenter pointed out that the agency should understand the
distinction between loan number goals and borrower number goals, as
well as new-borrower goals versus new-loan goals. The agency is aware
of the distinctions of establishing YBS quantitative targets by number
of loans versus number of borrowers or by number of new loans versus
new borrowers. However, we have left it to the decision of each direct
lender association to determine how best to establish its quantitative
YBS targets. This approach allows an association, for example, to
establish a quantitative target based on increasing the number of new
YBS borrowers if it determines that it wants to achieve a greater
number of YBS borrowers versus YBS loans.
One commenter supported the requirement that an association
establish quantitative targets that reasonably reflect the YBS
demographics in its territory rather than basing such targets on
nationwide data. However, many other commenters stated that no
meaningful demographic data exists that is reflective of an
association's territory and that using the data currently available
will lead to distortion and faulty analysis of an institution's YBS
market penetration. Another commenter stated that requiring
quantitative targets to reasonably relate to demographic data is unduly
burdensome. Still, another commenter asked the agency to explain
further what it means when it states that the quantitative targets must
be based on ``reasonably reliable'' demographic data that ``reasonably
reflect'' the YBS demographics in the lending territory. This commenter
believes these terms are too vague.
A reliable measurement is necessary to ensure that the System is
adequately fulfilling its YBS public purpose mission. We believe that
demographic data is necessary for each direct lender association to
adequately assess its YBS market characteristics, and we note that none
of the commenters suggested a more viable alternative for assessment.
Although we recognize that not all available demographic data may be an
ideal representation of the YBS market in each association's territory,
we still believe such data is useful and is a reasonable representation
of the YBS market in a lending territory.
Further, we do not believe it is burdensome to require that
quantitative targets be based on demographic data, as there is
available and easily obtainable data from the United States Department
of Agriculture's National Agricultural Statistics Service Census of
Agriculture (USDA Census). We have attempted to make the reliance on
demographic data less burdensome and costly by not requiring each
direct lender association, or an independent source, to complete a
demographic study. Instead, the rule allows for the use of the
available demographic data as long as an association can explain any
differences between its YBS quantitative targets and the data it is
relying upon to establish such targets. Finally, we note that
associations are free to obtain demographic data from other available
sources besides the USDA Census, such as state and county demographic
data or by any other appropriate means.
We do not believe the phrase ``reasonably reliable'' demographic
data that ``reasonably reflects'' the YBS demographics in a lending
territory is vague or lacking in sufficient specificity. The selection
of these terms employs the ``reasonable person'' standard `` that is,
whether a reasonable person with knowledge of the relevant facts would
question an association's reliance on the demographic data or the
reasonableness of its quantitative targets in light of such data. This
standard enables associations to draw on their sound business judgment
and knowledge of their territory in establishing their quantitative
targets. Hence, even when the demographic data is not an ideal
representation of an association's YBS market, the reasonable person
standard allows associations to establish targets in variance of such
data as long as they can justify the difference. Nevertheless, we have
revised Sec. 614.4165(c)(2) in the final rule to make it clear that
each direct lender association's quantitative targets must be based on
an understanding of how the data relates to the YBS market in the
association's lending territory, not directly based on the demographic
data. Since we believe ``reasonably reliable demographic data''
encompasses the meaning of the phrase in the proposed rule ``that
reasonably reflect the YBS demographics'', the latter phrase has been
removed.
One commenter suggested that the quantitative targets should
reflect not only existing demographics, but also more far-reaching
assessments of the needed changes in the distribution of farm assets to
achieve a more balanced and diverse structure of agriculture and future
borrower pools. The commenter suggested that this be accomplished by
inserting at the end of the first sentence in Sec. 614.4165(c)(2) the
following: ``and that progressively increase self-employment
opportunities in agriculture within the lending territory.''
The System's mission is to serve the credit and related services
needs of all farmers and ranchers. Although the System is not directly
responsible for increasing self-employment opportunities in
agriculture, its mission certainly helps to accomplish this goal by
making more agricultural credit available. Thus, we believe it is
unnecessary to add the suggested language to this section.
A number of commenters were dissatisfied with the rule's approach
permitting each direct lender association to establish their own
quantitative targets rather than defining specific targets in the rule
for the associations. The comments on this issue contained a number of
suggestions, including that the agency: develop specific targets on the
number of guaranteed loans made to beginning farmers and ranchers; look
to the targets of other GSE regulators, such as those required for
Freddie Mac and Fannie Mae, to help it set specific targets for the
System associations; and impose penalties when an association fails to
meet the specific targets.
The agency has strived throughout this rule to avoid dictating a
uniform Systemwide approach to fulfilling its YBS mission. Establishing
specific YBS quantitative targets for all System
[[Page 16467]]
associations would be inconsistent with our approach and impractical
given the unique demographic and lending environments of each
association's territory. The agency's examination and enforcement
authorities will enable us to evaluate the reasonableness of each
association's quantitative targets and to require adjustments to the
targets where deemed necessary.
Section 614.4165(c)(3)--Qualitative Goals
One commenter expressed concern that Sec. 614.4165(c)(3)(i), which
requires YBS services to be offered in coordination with others,
interferes with a direct lender association's ability to make its own
choices on the types of related services it wishes to offer. This
requirement, to coordinate with others when offering related services,
is required by section 4.19(a) of the Act. Neither the Act nor this
rule dictate what type of related services must be offered. However,
the requirement to coordinate with others ensures that YBS borrowers, a
group that can especially benefit from related services, will receive
the help they need in their farming or ranching operations. By offering
such services in coordination with others, associations may find the
expertise and the cost-sharing benefits necessary to provide a full
array of services.
One commenter suggested we add language to Sec. 614.4165(c)(3)(i)
and (ii) that specifically includes nongovernmental organizations when
describing the offering of credit and services in coordination with
others. We do not believe this language change is necessary because the
rule, at Sec. 614.4165(c)(3)(ii), requires that each direct lender
association take full advantage of opportunities for coordinating
credit and services offered by other Farm Credit System institutions,
and other governmental and private sources of credit and services.
Private sources of credit would include nongovernmental organizations,
as the commenter suggested.
Another commenter believed that Sec. 614.4165(c)(3)(iii), which
requires direct lender associations to implement outreach programs, is
inappropriate and usurps board authority and accountability. The
commenter further stated that the rule should not prescribe how board
and management assess customer needs and how they communicate with the
customers through their marketing efforts. The requirement in the
proposed rule to implement outreach programs is similar to current FCA
policy on System YBS programs. The rule does not take any
responsibility out of the hands of an association's board to oversee
its YBS outreach efforts nor does it tie management's hands in
implementing outreach programs. The rule simply states that a minimum
component of an association's YBS program must include outreach
programs and suggests types of outreach activities that an association
might consider. An association board and management are free to pursue
appropriate outreach activities, including others than those suggested
in the rule.
Finally, one commenter suggested that the final rule include goals
for loan restructuring for YBS borrowers. Direct lender associations
must provide borrower rights to all of their borrowers.\12\ The
decision to restructure a distressed loan is a fact-specific one that
must be made on a case-by-case basis. Setting goals for restructuring
YBS loans would be contrary to sound lending practices and could
jeopardize the safe and sound operations of an association.
---------------------------------------------------------------------------
\12\ On February 10, 2004, the FCA board adopted a final rule
that revised the borrower rights regulations at Part 614, subpart N
and redesignated them to Part 617; see 69 FR 10901, March 9, 2004.
---------------------------------------------------------------------------
Section 614.4165(c)(4)--Credit Enhancements and Risk-bearing Capacity
One commenter suggested that the final rule include special credit
treatment, special interest rates, and loan participation programs for
YBS borrowers. Similar to all of the minimum components for a YBS
program set forth in this rule, this section simply states that YBS
loans must be offered in a safe and sound manner and within an
association's risk-bearing capacity. This section of the rule then
suggests types of credit enhancements that an association can use to
manage risk while providing more opportunities to its YBS borrowers.
In all of the minimum components, our approach remains consistent.
That is, each direct lender association has the flexibility to design a
YBS program within the rule's minimum requirements. We believe it would
be inconsistent with our role as a safety and soundness regulator to
require specific types of credit enhancements. Therefore, although we
agree with the commenter that special credit treatment, special
interest rates, and loan participation programs are reasonable types of
credit enhancements, it is up to each direct lender association to
determine if sound business practices and its risk-bearing capacity
would permit it to offer such enhancements.
One commenter stated that this section's reference to risk-bearing
capacity will be used by System associations as an excuse not to lend
to YBS borrowers. System associations must always consider their risk-
bearing capacity when extending credit and services. It is especially
important to consider risk when extending credit to a potentially less
financially stable group of borrowers, such as YBS borrowers.
Nevertheless, associations are still expected to demonstrate that they
are meeting the credit and services needs of the YBS community in their
respective territories. The requirements for YBS programs set forth in
this final rule should enhance System YBS programs and help ensure that
the System successfully achieves its YBS mission in a safe and sound
manner.
For all the foregoing reasons, we are adopting Sec. 614.4165(c) as
final with only two changes. As we explained above, we have revised
Sec. 614.4165(c)(2) in the final rule to make it clear that each
direct lender association's quantitative targets must be based on an
understanding of how the data relates to the YBS market in the
association's lending territory, not directly based on the demographic
data. Since we believe ``reasonably reliable demographic data''
encompasses the meaning of the phrase in the proposed rule ``that
reasonably reflect the YBS demographics'', the latter phrase has been
removed.
Further, as explained in the following section, in the final rule
we are adding the following language to the end of Sec.
614.4165(c)(3)(iii): ``as well as an advisory committee comprised of
``young,'' ``beginning,'' and ``small'' farmers and ranchers to provide
views on how the credit and services of the direct lender association
could best serve the credit and services needs of YBS farmers and
ranchers.''
Section 614.4165(d)--YBS Advisory Committee
This section of the proposed rule explains that each direct lender
association could, at its option, establish and maintain an advisory
committee comprised of young, beginning, and small farmers and
ranchers. We included this recommendation because we believe a YBS
advisory committee could help each association determine the credit and
services needs of YBS farmers and ranchers in its territory. Similarly,
this committee could serve as the association's conduit to the YBS
community and other agricultural interest groups and lending sources
[[Page 16468]]
serving the needs of YBS farmers and ranchers.
One commenter supported the inclusion of this recommendation in the
final rule and suggested we make the YBS advisory committee a
requirement of each direct lender association's YBS program rather than
an option. The commenter also suggested that the membership of the
advisory committee be expanded to include university and
nongovernmental organization representatives that work with YBS farmers
and ranchers. Although we certainly encourage each direct lender
association to establish an advisory committee as a way of reaching out
to the YBS community in its territory, we recognize that it may not be
feasible or cost-effective for every association to create and maintain
such a committee. Further, given the unique demographics of each direct
lender association's territory, we think it best to allow each
association to determine the makeup of its advisory committee
membership should it choose to create one. Therefore, we have not
incorporated these suggestions into the final rule.
As we explained earlier, one commenter expressed concern that the
use of suggestions and recommendations in the YBS rule left the System
unclear as to what the rule actually requires. Because the formation of
an advisory committee is a type of outreach activity, we have moved the
suggestion of an advisory committee to Sec. 614.4165(c)(3)(iii) of the
final rule and deleted Sec. 614.4165(d). We believe this change in the
final rule will make it clearer that the formation of a YBS advisory
committee is a suggested rather than required component of a YBS
program.
Section 614.4165(e)--Review and Approval of YBS Programs
This section implements section 4.19(a) of the Act, which requires
each direct lender association's YBS program to be subject to the
``review and approval'' of its funding bank. One commenter noted that
there is no benefit to involving the funding banks in monitoring or
approving the YBS programs of its affiliated direct lender
associations. We note that the ``review and approval'' language is
statutory and reflects congressional intent to involve the System
banks, to some extent, in the YBS programs of their affiliated direct
lender associations. The agency has no authority to simply disregard
this congressional directive. Clearly, the System banks and
associations have a common goal in ensuring that the special direction
from Congress with regard to YBS farmers and ranchers is accomplished.
For instance, System banks may want to work with their affiliated
associations in coordinating credit and service opportunities for the
YBS community in its district. Thus, we see a benefit in keeping the
funding banks aware of the YBS programs being conducted by their
affiliated associations to further ensure the accomplishment of the
System's YBS mission.
Contrary to the previous comment, another commenter commended FCA
for correctly reflecting the evolved relationship between System banks
and their affiliated direct lender associations by appropriately
defining the bank's approval requirements of an association's YBS
program. In narrowly interpreting the ``review and approval'' statutory
language, the agency does indeed recognize the autonomy gained by
direct lender associations since the addition of section 4.19 to the
Act in 1980. For all the foregoing reasons, we redesignate this section
as Sec. 614.4165(d) and adopt it as final.
Section 614.4165(f)--YBS Program and the Operational and Strategic
Business Plan
This section of the rule requires direct lender associations to
include their YBS quantitative targets and qualitative goals in their
operational and strategic business plans. One commenter supported this
section while another commenter suggested that this section be deleted
from the final rule. This latter commenter expressed concern that this
section imposes additional administrative and reporting burdens on
System institutions while providing no greater flexibility to serve YBS
farmers and ranchers. We do not find the commenter's concerns
convincing. This provision is intended to help associations define the
steps by which they will accomplish their mission to serve YBS
borrowers and build on their commitment to meeting their YBS targets
and goals. We do not believe it is overly burdensome to include the YBS
targets and goals, which associations must already develop, in their
operational and strategic business plans. Moreover, most associations
that have been adopting effective business plans under Sec. 618.8440
of FCA regulations have already been including their YBS program
projections in such plans. For all the foregoing reasons, we
redesignate this section as Sec. 614.4165(e) and adopt it as final.
Section 614.4165(g)--YBS Program Internal Controls
The rule requires that each direct lender association include, as
part of its YBS program, comprehensive and detailed internal controls.
These internal controls include establishing clear lines of
responsibility for YBS program implementation, YBS performance results,
and YBS quarterly reporting. Regular and reliable reporting to the
board of directors helps an association to assess the strengths and
weaknesses of its YBS program. The quarterly reporting requirement in
the final rule will provide the board of directors an opportunity to
assess its association's YBS program and consider any necessary changes
or adjustments to its program components. Oversight and control of an
association's YBS program will help ensure that the program is managed
effectively and will contribute to its overall success. We received no
comments on this section. Therefore, we redesignate the section as
Sec. 614.4165(f) and adopt it as final.
Section 620.5(n)--Contents of the Annual Report to Shareholders
The rule requires each direct lender association to include in its
annual report to shareholders a description of its YBS program,
including a status report on each program component, as set forth in
Sec. 614.4165(c) of the proposed rule, as well as the definitions of
``young,'' ``beginning,'' and ``small'' farmers and ranchers. The rule
also requires that the YBS discussion provide other information
necessary for a comprehensive understanding of the direct lender
association's YBS program and its results. In addition, the rule
requires each Farm Credit bank to include in its annual report to
shareholders a summary report of just the quantitative YBS data from
its affiliated direct lender associations as described in FCA's
instructions for the annual YBS year-end report. The rule also requires
each Farm Credit bank's annual report to include the definitions of
``young,'' ``beginning,'' and ``small'' farmers and ranchers, as well
as any other information that may be necessary for an ample
understanding of the YBS mission results of the affiliated direct
lender associations in its district.
Many commenters supported the requirement to include in the annual
reports of each direct lender association and System bank a discussion
of YBS program and performance results. A few commenters suggested that
we require each direct lender association to report YBS program
activity on an individual institution basis. Other commenters suggested
that the annual reports be made available to the public, either on the
banks and associations Web sites and/or on FCA's Web site. The rule
already requires each direct lender
[[Page 16469]]
association to report on its YBS program activity in its annual report
to shareholders and in the YBS year-end report to the FCA. We also note
that many System institutions currently make their annual reports
available to the public on their Web sites. The System's YBS year-end
reports, listed by individual associations, are also available on the
agency's Web site. However, the question of whether FCA should require
annual reports to be posted on System institution Web sites is an issue
for consideration beyond the scope of this rulemaking and one that will
be considered if the agency should decide to revise its disclosure
regulations at some future time. Finally, the public may request a copy
of any System institution's annual report from either the individual
institution or the FCA.
Several commenters opposed the requirement to include YBS
information in System institutions' annual reports to shareholders,
recommending that the annual report requirements be deleted altogether.
These commenters advocated that the decision to include YBS information
in an annual report should be left up to each institution's board of
directors. The commenters also suggested that FCA runs the risk of
reducing innovation in System YBS program development as direct lender
associations focus more on meeting the agency's reporting requirements
than on working with YBS customers. One commenter stated that the
annual report should not become a replacement document for business
plans, or measurements for examination purposes, but instead should
remain a vehicle to report the operating results of the institution.
The agency is not swayed by these comments to delete any of the
proposed annual YBS reporting requirements.
Moreover, we continue to believe reporting to shareholders and the
public on the YBS mission results will underscore the importance of the
System's public purpose YBS mission and will result in greater
transparency to the public on the System's accomplishment of this
mission.
One commenter suggested the agency require direct lender
associations to include in their annual reports a description of
special credit treatments, special interest rates, and loan
participation programs available to YBS borrowers. This commenter
believes the proposed rule did not go far enough in encouraging the use
of such credit enhancements.
The rule requires each direct lender association to include in its
annual report a description of its YBS program, including a status
report on each program component set forth in Sec. 614.4165(c).
Establishing qualitative goals is a required component of an
association's YBS program, which includes credit enhancement programs.
Thus, we believe the rule already requires associations to describe its
credit enhancement program goals in its annual report.
One commenter indicated that it was unclear in the rule whether
associations will be required to include in their annual reports their
YBS performance with regards to related services offered to their YBS
borrowers. The rule clearly requires associations to report on their
related services offered under their YBS programs. Specifically, Sec.
620.5(n)(2) of the rule requires a status report on each program
component as set forth in Sec. 614.4165(c). The offering of related
services is a program component under Sec. 614.4165(c)(3)(i) of the
rule. Thus, associations must include in their annual reports to
shareholders a status report of their efforts to offer related services
under their YBS programs.
In contrast to the previous comments, which address the reporting
and disclosure of YBS information by System institutions, the following
comments address FCA's role in reporting and disclosing YBS data.
Several commenters stated that if the proposed rule is made final
without major revisions to its public disclosure requirements, FCA will
have failed as a Federal regulator by abrogating its mission to protect
the public's right to know about how the System is fulfilling its YBS
mission. The commenters believe the FCA should compile the YBS
information itself and release it to the public. The FCA disagrees with
the commenters' statement.
Under section 4.19(b) of the Act, it is the System associations who
must report on their YBS activities to the banks and, in turn, the
banks must submit an annual report to FCA summarizing the YBS
operations and achievements of their affiliated associations. It is
clearly the responsibility of the System institutions rather than the
FCA to report on their YBS operations and achievements. However, in
addition to System YBS yearend reports, the agency also includes a
summary of the System's YBS results in our annual performance report
(these reports are available on FCA's Web site). Finally, as noted
earlier, the agency is taking steps to disclose future System
institutions' YBS compliance ratings to the public. The agency believes
these various YBS reports are more than sufficient to give the public
an ample understanding of each direct lender association's YBS program
and related performance results as well as the System's overall YBS
performance and achievements.
Finally, several commenters stated that FCA should disclose
consolidated YBS data for each district rather than require System
banks to do so in their annual reports to shareholders. The commenters
assert that there is no basis in the Act for such a reporting
requirement and that requiring the banks to include in their annual
reports to shareholders YBS information gathered from their affiliated
associations imposes an unnecessary burden in light of the fact that
the associations are the shareholders of their respective funding
banks.
The FCA disagrees that there is no basis in the Act for this
requirement. As previously noted, section 4.19(b) of the Act requires
System banks to provide FCA with a report summarizing the YBS
operations and achievements of its affiliated direct lender
associations. Further, sections 5.17(8) and 5.19(b)(1) of the Act give
the agency broad authority to establish reporting requirements for
System institutions so that all parties interested in the operations of
the System, including shareholders, investors, Congress, and the public
at large, can assess the System's performance and mission fulfillment
as a GSE. Further, although the banks acquire their YBS information
from their affiliated associations, it is still helpful for the
associations to view, at a glance, how the district as a whole is
performing its YBS mission. Thus, we believe the inclusion of this YBS
data in the annual reports of the banks would be helpful to the
associations. Moreover, we do not believe the consolidated YBS
reporting requirements are burdensome for the banks. The rule requires
the System banks to include in their annual reports to shareholders a
summary report of just the YBS quantitative data from their affiliated
direct lender associations. This quantitative data must already be
submitted to the agency in each bank's annual YBS yearend report. Thus,
it is not significantly more burdensome for the banks to include this
same data in their annual reports to shareholders. Finally, the agency
believes it is first and foremost the responsibility of each System
institution, rather than the FCA, to report information regarding its
YBS program results.
For all the foregoing reasons, we adopt proposed Sec. 620.5(n) as
final without change.
[[Page 16470]]
Section 630.20(p)--Contents of the Annual Report to Investors
The rule requires the funding banks to include a report on
consolidated YBS lending data of their affiliated associations in their
Systemwide annual report to investors and to include the definitions of
``young,'' ``beginning,'' and ``small'' farmers and ranchers.
Additionally, the rule requires that the report include any other
information that may be necessary for ample understanding of the
System's YBS mission results.
Several commenters raised concerns about the System banks not
having enough time to collect and analyze the YBS data for inclusion in
the report to investors. (This same concern was raised with respect to
including YBS data in the System banks' and associations' annual
reports to shareholders.) These commenters raised this concern because
of anticipated new and shorter timeframes for publishing such reports
in order to be more responsive to the marketplace. The agency believes
the impact of adding the YBS data to the report to investors will be
insignificant compared to all the other data the banks must include in
this report.
For all the foregoing reasons, we adopt proposed Sec. 630.20(p) as
final without change.
VII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the rule will not
have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with
their affiliated associations and service corporations, has assets and
annual income in excess of the amounts that would qualify them as small
entities. Therefore, System institutions are not ``small entities'' as
defined in the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
0
For the reasons stated in the preamble, parts 614, 620, and 630,
chapter VI, title 12 of the Code of Federal Regulations are amended as
follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
1. The authority citation for part 614 continues to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19,
4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6,
7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011,
2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091,
2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149,
2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5);
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart D--General Loan Policies for Banks and Associations
0
2. Section 614.4165 is revised to read as follows:
Sec. 614.4165 Young, beginning, and small farmers and ranchers.
(a) Definitions.
(1) For purposes of this subpart, the term ``credit'' includes:
(i) Loans made to farmers and ranchers and producers or harvesters
of aquatic products under title I or II of the Act; and
(ii) Interests in participations made to farmers and ranchers and
producers or harvesters of aquatic products under title I or II of the
Act.
(2) For purposes of this subpart, the term ``services'' includes:
(i) Leases made to farmers and ranchers and producers or harvesters
of aquatic products under title I or II of the Act; and
(ii) Related services to farmers and ranchers and producers or
harvesters of aquatic products under title I or II of the Act.
(b) Farm Credit bank policies. Each Farm Credit Bank and
Agricultural Credit Bank must adopt written policies that direct:
(1) The board of each affiliated direct lender association to
establish a program to provide sound and constructive credit and
services to young, beginning, and small farmers and ranchers and
producers or harvesters of aquatic products (YBS farmers and ranchers
or YBS). The terms ``bona fide farmer or rancher,'' and ``producer or
harvester of aquatic products'' are defined in Sec. 613.3000 of this
chapter;
(2) Each affiliated direct lender association to include in its YBS
farmers and ranchers program provisions ensuring coordination with
other System institutions in the territory and other governmental and
private sources of credit;
(3) Each affiliated direct lender association to provide, annually,
a complete and accurate YBS farmers and ranchers operations and
achievements report to its funding bank; and
(4) The bank to provide the agency a complete and accurate annual
report summarizing the YBS program operations and achievements of its
affiliated direct lender associations.
(c) Direct lender association YBS programs. The board of directors
of each direct lender association must establish a program to provide
sound and constructive credit and services to YBS farmers and ranchers
in its territory. Such a program must include the following minimum
components:
(1) A mission statement describing program objectives and specific
means for achieving such objectives.
(2) Annual quantitative targets for credit to YBS farmers and
ranchers that are based on an understanding of reasonably reliable
demographic data for the lending territory. Such targets may include:
(i) Loan volume and loan number goals for ``young,'' ``beginning,''
and ``small'' farmers and ranchers in the territory;
(ii) Percentage goals representative of the demographics for
``young,'' ``beginning,'' and ``small'' farmers and ranchers in the
territory;
(iii) Percentage goals for loans made to new borrowers qualifying
as ``young,'' ``beginning,'' and ``small'' farmers and ranchers in the
territory; or
(iv) Goals for capital committed to loans made to ``young,''
``beginning,'' and ``small'' farmers and ranchers in the territory.
(3) Annual qualitative YBS goals that must include efforts to:
(i) Offer related services either directly or in coordination with
others that are responsive to the needs of the ``young,''
``beginning,'' and ``small'' farmers and ranchers in the territory;
(ii) Take full advantage of opportunities for coordinating credit
and services offered with other System institutions in the territory
and other governmental and private sources of credit who offer credit
and services to
[[Page 16471]]
those who qualify as ``young,'' ``beginning,'' and ``small'' farmers
and ranchers; and
(iii) Implement effective outreach programs to attract YBS farmers
and ranchers, which may include the use of advertising campaigns and
educational credit and services programs beneficial to ``young,''
``beginning,'' and ``small'' farmers and ranchers in the territory, as
well as an advisory committee comprised of ``young,'' ``beginning,''
and ``small'' farmers and ranchers to provide views on how the credit
and services of the direct lender association could best serve the
credit and services needs of YBS farmers and ranchers.
(4) Methods to ensure that credit and services offered to YBS
farmers and ranchers are provided in a safe and sound manner and within
a direct lender association's risk-bearing capacity. Such methods could
include customized loan underwriting standards, loan guarantee
programs, fee waiver programs, or other credit enhancement programs.
(d) Review and approval of YBS programs. The YBS program of each
direct lender association is subject to the review and approval of its
funding bank. However, the funding bank's review and approval is
limited to a determination that the YBS program contains all required
components as set forth in paragraph (c) of this section. Any
conclusion by the bank that a YBS program is incomplete must be
communicated to the direct lender association in writing.
(e) YBS program and the operational and strategic business plan.
Targets and goals outlined in paragraphs (c)(2) and (c)(3) of this
section must be included in each direct lender association's
operational and strategic business plan for at least the succeeding 3
years (as set forth in Sec. 618.8440 of this chapter).
(f) YBS program internal controls. Each direct lender association
must have internal controls that establish clear lines of
responsibility for YBS program implementation, YBS performance results,
and YBS quarterly reporting to the association's board of directors.
PART 620--DISCLOSURE TO SHAREHOLDERS
0
3. The authority citation for part 620 continues to read as follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart B--Annual Report to Shareholders
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4. Amend Sec. 620.5 by adding a new paragraph (n) to read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(n) Credit and services to young, beginning, and small farmers and
ranchers and producers or harvesters of aquatic products.
(1) Each direct lender association must describe the YBS
demographics in its territory and the source of the demographic data.
If there are differences in the methods by which the demographic and
YBS data are presented, these differences must be described.
(2) Each direct lender association must provide a description of
its YBS program, including a status report on each program component as
set forth in Sec. 614.4165(c) of this chapter and the definitions of
``young,'' ``beginning,'' and ``small'' farmers and ranchers. The
discussion must provide such other information necessary for a
comprehensive understanding of the direct lender association's YBS
program and its results.
(3) Each Farm Credit bank must include a summary report of the
quantitative YBS data from its affiliated direct lender associations as
described in FCA's instructions for the annual YBS yearend report. The
report must include the definitions of ``young,'' ``beginning,'' and
``small'' farmers and ranchers. A narrative report may be necessary for
an ample understanding of the YBS mission results.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
0
5. The authority citation for part 630 continues to read as follows:
Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C.
2252, 2254).
Subpart B--Annual Report to Investors
0
6. Amend Sec. 630.20 by adding a new paragraph (p) to read as follows:
Sec. 630.20 Contents of the annual report to investors.
* * * * *
(p) Credit and services to young, beginning, and small farmers and
ranchers and producers or harvesters of aquatic products. The Farm
Credit banks must include a report on consolidated YBS lending data of
their affiliated associations. The report must include the definitions
of ``young,'' ``beginning,'' and ``small'' farmers and ranchers. A
narrative report may be necessary for an ample understanding of the YBS
mission results.
Dated: March 23, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-6967 Filed 3-29-04; 8:45 am]
BILLING CODE 6705-01-P